Labor and Capital Mobility, and the Recovery

I was thinking this weekend that one reason the US recovery may be slow is related to labor and capital mobility.

One substantial avenue to recovery in a recession has always been labor and capital mobility.  The fast labor and capital can be redeployed from losing industries to improving ones, the faster a recovery occurs.  One reasons Japan and certain European countries have had slower recoveries in the past than the US is that our mobility was higher and barriers to entrepreneurship lower.

But it strikes me that two things are going on in the US to endanger this advantage we have always enjoyed

  1. The government push for home ownership has turned out to be a trap.  Not only did it help create the bubble, whose bursting destroyed a lot of real and paper wealth, but it has greatly reduced labor mobility.  Home ownership makes labor mobility much harder even in a good housing market when one can sell his or her home easily.  In a bad market like today, very few feel they can pick up and move.  I might want to give up on the construction industry in Michigan and move to the oil patch of North Dakota, but how can I do that if I own a home that I can't sell?  A number of other actions, most notably the repeated extension of unemployment benefits, contributes to the lack of mobility.
  2. The government seems hell bent on doing everything it can to prevent, even reverse the tide, of capital mobility.  The government shifted tends of billions of capital into auto industry hands that had destroyed value for decades.  It continues to put the brakes on what should be an oil and gas exploration and production boom.  It kills health industries like light bulbs and shifts billions into useless politically powerful hands making ethanol.  The NLRB is preventing major American manufacturers from making factory investments in southern states.

In the late 1970's, the auto industry was in trouble but the oil patch was booming.  The Houston newspapers sold well in Michigan, popular for their help wanted ads.  From space, the Interstate highways between the Detroit and Texas probably looked orange from all the U-haul trailers.

The exact same dynamics could and should be occurring today.  Capital and labor should be shifting from, for example, the failing auto industry to the growing energy sector.  But the government today stands to block this reallocation. It is raising taxes on oil companies and placing barriers to their growth, while giving tax money to the auto industry and using every bit of power it can to sustain it.  Combine this type of barrier to capital flows (and auto/energy is but a couple of examples) with rising barriers to entrepreneurship, and it should be no surprise that growth is abysmal.

This is what happens in a corporate state.  Past winners retain huge amounts of power in the government long after their companies have become senescent in the marketplace.  Politicians argue for the power to pick winners and losers in the economy but generally use it only to protect current competitors and stand in the way of progress.

  • Steven

    The NLRB is preventing factory investments in northern states as well.

  • tomw

    Ummmh .... can you say Boeing and North Carolina??? and NLRB all in one breath without distaste?

    Talk about restrictions on trade, commerce and blocking the mobility of labor and capital.

    tom

  • marco73

    Its Boeing and South Carolina. The new plant is in North Charleston. The plant actually started building 787's (the Dreamliner) last Friday.
    What is the NLRB going to do, send in Federal Marshalls to shut down the plant?

  • perlhaqr

    What is the NLRB going to do, send in Federal Marshalls to shut down the plant?

    Of course they won't. They probably have their own SWAT team they'll send instead.

  • caseyboy

    Coyote, you are so right on the mark. Can anyone pull our bacon from the fire?

  • DensityDuck

    It used to be that industries could grow faster than regulators could choke them. Now that everyone's been convinced to buy into a 30-year mortgage (and prices crashed so they can't leave) the industries can't grow because nobody can afford to go work for them.

    What companies ought to be doing is saying "look, we'll pay you 2/3rds of the going rate, but we'll also buy a house and let you live in it rent-free as long as you work for us, and we also won't care if your credit rating is trashed because you walked away from a mortgage". I'd certainly go for that.

  • Todd Ramsey

    Nobel Laureate Robert Lucas has a plausible theory for the slow recovery. His slides are available at http://www.econ.washington.edu/news/millimansl.pdf .